Simpler Tax Code Good, But No Tax Prep Better

I’ve just finished preparing my federal tax returns. I do them myself not only to save professional preparation fees, but to see what deductions and credits I might claim — and the plethora I never could.

But I know that someone can claim them because every tax-reducing provision got into the code for a reason — not necessarily what we who don’t benefit think a good one, of course.

This is one of the reasons the big brouhaha about tax reform may come to nothing.

The biggest barrier at this point is the partisan divide on what to do with savings the federal government would achieve if it weren’t spending so much through the tax code — an estimated $1.3 trillion this year alone.

The Republicans, as you probably know, want to use all the savings to offset the costs of reducing tax rates.

The Democrats generally want to use some of the savings for deficit reduction, thus meeting the targets in the Budget Control Act with less severe cuts than the mandatory caps would require. But they’re far from united.

The other barrier though is that every provision that tax reform might eliminate or constrict has a constituency.

Hedge fund managers, for example, would again cry out if Congress tried to close the loophole that allows them to pay the lower capital gains rate on what’s really salary income.

The largest tax expenditures have much larger constituencies — in some cases, more than one.

The mortgage tax interest deduction, for example, is near and dear not only to homeowners (and yacht owners), but to real estate brokers, building companies and, of course, mortgage bankers.

So actually cleaning out the tax code may prove beyond what this highly-partisan — and donor-indebted — Congress can do.

It could, however, make the tax code “simpler and smarter,” as Howard Gleckman at the Tax Policy Center suggests.

At least one of the simpler, smarter reforms tax experts have recommended would benefit low-income couples, many of whom pay to have their tax forms prepared because of the complexities involved in claiming the Earned Income Tax Credit and the Child Tax Credit.

Anyone who’s seen the signs in the windows of neighborhood tax preparers knows that these couples are likely to be offered instant refunds — essentially for-fee advances on what the preparer figures they’ll get from the Internal Revenue Service and perhaps their state tax office.

A now-outdated, but still useful study found that taxpayers in the Washington, D.C. area forfeited, on average, more than $189 of a $1,500 EITC refund once all the fees, including the refund anticipation loan were deducted.

That was back in 2001-2. Fees have gone up since then, of course. And though banks have been forced out of the RAL business, tax preparers have found workarounds.

If claiming the refundable credits were a whole lot simpler, low-income families would get the full benefit intended. And volunteers who provide free tax preparation services could help more of those who still found the forms daunting.

Or what about letting IRS do the tax prep work for free? This probably wouldn’t save time — or alternatively money — for filers who can claim those various arcane credits and/or will owe less if they itemize.

But past studies have estimated that well over 40% of filers would use what’s been called a return-free system. Their savings could total more than $2 billion a year.

And IRS would collect some portion of the $350 billion that the now-Chairman of the Senate Finance Committee has said we collectively owe, but don’t pay.

Which is why Grover Norquist, whose cause in life is starving the federal government of tax revenues, opposes it, as do some other so-called taxpayer advocacy groups.

Lined up in opposition for other, obvious reasons are members of the Computer and Communications Industry Association, including Intuit. It’s the firm that produces TurboTax — the software most do-it-yourselfers use.

Intuit claims, among other things, that a voluntary return-free system would curtail “citizen participation in the taxation process” because lots of us take stock of our personal finances only at tax time — and, one’s given to understand, wouldn’t if all we had to do was review, edit or altogether reject a form IRS prepared for us.

Nothing whatever to do with the $1.47 billion or so that Intuit reaps from TurboTax.

I, for one, would readily forgo the form of participation I’ve just concluded — and the alleged “financial literacy” I’ve gained — if I could just check what IRS had produced against the 1099s I’ve laboriously keyed in

What about you?

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